Ghana: Fostering continued growth

The government is taking a number of measures to strengthen Ghana’s business environment in a bid to reinforce growth as the country struggles with a rising import bill due to a depreciating cedi.

After seeing record GDP growth of 13.6% in 2011, influenced by the country’s emerging oil industry and exports of commodities such as gold and cocoa, efforts to enhance the business environment in the short term will be crucial to ensuring continued economic growth.

In that regard, the government’s plans to curb the fiscal deficit and accelerate repayments of arrears to local businesses should strengthen investor confidence and allow more breathing room for the expansion of small and medium-sized enterprises (SMEs). The government also expects the country to receive a record $5bn in foreign direct investment (FDI) in 2012, which should also go a long way to boosting wider expansion.

Growth will also be encouraged by plans to invest in agriculture expansion. The World Bank recently approved a $100m loan to enhance the investment environment of the sector through simplified access to land for investors, easier connections between small farmers and markets, assistance facilitating contractual procedures, and promotion of public-private partnerships. These are part of a government effort to foster FDI and develop commercial agriculture. Modernisation of the agriculture sector will be key for the country to expand the benefits of economic growth.

Ghana’s economy is set to receive further encouragement through an additional $30m interest-free loan from the World Bank through its International Development Association. The aim is to attract private finance and develop a series of public-private partnership projects that will focus on infrastructure development. A $3bn loan agreement recently signed with the China Development Bank is also poised to help develop Ghana’s gas infrastructure.

Investment in infrastructure will also come from the US-based Overseas Private Investment Corporation (OPIC) via a $150m political risk insurance programme to cover the rehabilitation of Ghana’s water system. The Ghana National Water Infrastructure Modernisation project aims to increase access to clean water from the current level of 61% of the population to 85% by 2015, according to media reports.

Although the inflow of investment will help to increase the competitiveness of the economy, there has been some growing pressure on the monetary front, as the rise in demand for foreign exchange by corporations and importers is pushing the cedi down.

“The weakening cedi has been influenced by deteriorating international economic conditions, as well as investor caution regarding the coming elections this year,” Samuel Kofi Ampah, the head of research at Gold Coast Securities, a US-based financial services firm, told OBG.

In mid-April, at the last meeting of the Central Bank’s Monetary Policy Committee (MPC), the banking regulator, the government body increased its policy rate to 14.5%, up from the 13.5% it had set in February. The earlier move was unable to halt the currency’s devaluation trend: in the first three months of 2012, the cedi depreciated 8.7% against the dollar.

Further depreciation of the cedi will make much-needed imports more expensive and continue to encourage price inflation, which registered an increase in March to 8.8% from 8.6% in February. Rising salaries in the public sector, as well as the government’s decision to cut state subsidies on fuel products in December 2011, may also influence the rise in prices. The end of state subvention for petroleum products, for example, led to an immediate 15% increase on fuel prices.

The government has been trying to discourage the growth of imports, which in 2011 cost Ghana $3bn in foreign reserves, with the country’s trade deficit reaching 8%. Kwesi Amissah-Arthur, the governor of the Bank of Ghana, recently said the country should be vigilant regarding the increasing weight of imported goods. “If the goods are meant for manufacturing, which will fuel future growth, then that is good, but we need to curb our demand for consumption imports,” he told local media this month.

During the recent Africa Investment Forum, held in Accra at the beginning of April, Vice-President John Dramani Mahama encouraged international and domestic investors to resist a “wait-and-see attitude”. To encourage those investors to take a chance in Ghana and to sustain local growth in 2012, careful management of the private sector would go a long way to seeing greater opportunities for wider macro-economic growth.